Archives of “preconceived notions” tag

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Risk Management Game

  
  Education
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A random person is pulled off the street and given $10,000 to trade.  They have no prior experience which, on the bright side, means they have no bad habits, emotional baggage, or preconceived notions.  Before trading they go through a five day crash course on market basics (order entry process, chart reading, pattern recognition, etc…).  Suppose you are tasked with the responsibility of drafting a set of risk management rules which they are required to abide by.  The objective is to make them survive as long as possible in the trading arena so they can learn as much as possible through first-hand experience.

What types of rules would you set?

The ideal approach of course is to structure a set of rules which makes it as difficult as possible to blow up the account while still leaving them open to accumulating profits.  The goal isn’t so much helping them capture large gains as much as it is helping them survive.  After learning how to survive, then they can modify their approach to being more aggressive and seeking larger gains.

Here are two of my top rules: (more…)

Technically Speaking

  
Analysis, Education
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A great reminder from technical analyst John Murphy:

“The statement ‘market action discounts everything’ forms what is probably the cornerstone of technical analysis. […] The technician believes that anything that can possibly affect the price–fundamentally, politically, psychologically, or otherwise–is actually reflected in the price of that market.”

Alfred Cowles adds:

“This evidence of structure in stock prices suggests alluring possibilities in the way of forecasting. In fact, many professional speculators, including in particular exponents of the so-called Dow Theory widely publicized by popular financial journals, have adopted systems based in the main on the principle that it is advantageous to swim with the tide.”

William Dunnigan adds:

“We think that forecasting should be thought of in the light of measuring the direction of todays trend and then turning to the Law of Inertia (momentum) for assurance that probabilities favor the continuation of that trend for an unknown period of time into the future. This is trend following, and it does not require us to don the garment of the mystic and look into the crystal balls of the future.”

Richard Donchian adds:

“When I first got into commodities, no one was interested in a diversified approach. There were cocoa men, cotton men, grain men they were worlds apart. I was almost the first one who decided to look at all commodities together. Nobody before had looked at the whole picture and had taken a diversified position with the idea of cutting losses short and going with a trend.” (more…)

Control

  
  Education
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Control-Stocks rise when they are being bought up. Stocks fall when they are being sold off. I always ask myself “Who is in control. The buyers or sellers.” Control changes often and in different time frames you can argue that one party or the other were merely taking a rest.
I generally buy stocks that are going up and short sell stocks that are falling. But I also play the sharp reversals that happen if there is a huge gain or drop as I know gravity will take effect and profit taking will occur. The smart way to day trade is to be on the winning side be it buyers or sellers.
As a small fish in a big ocean I can only ride on the coattails of the big boys who actually move the market. My job as a trader is to recognize when trend or momentum is starting to kick in and climb aboard. Short term trends or momentum are the only thing that I trade. The old cliche’ “the trend is your friend” is so very true.
I only trade in the direction the chart is telling me to. Maybe you can watch the talking heads on TV blathering on or read about how great some stock is without forming an opinion on it. I can’t, so it’s safer to insulate myself from any and all information. I actually don’t care what, where, why, how or when a company does what it does. Who am I to be able to process all this information? I do know that when a stock is rising, more people are buying it than selling it and vice versa. Seems easier to me to only look at and believe the chart and trade accordingly. If I have preconceived notions about what the stock may do, I will not be able to cut my losses when the chart tells me to. I will hold on to the dream all the way to the poor house. Always trade with the trend.
Cutting your losers is one of the most important aspects of trading.Unless you have an unlimited pile of money to fritter away you must admit you’re wrong and exit the trade. If you don’t you will not have enough to remain in the game. End of story.
Letting the winners run is also important. They are winners after all and that is all that counts. Adding size (buying more shares) can turn little winners into big winners.
If you disregard any or all of these 3 simple rules you won’t be around trading very long.

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